Dollar Tree's plans to expand in Canada seen as risky

Sruthi Ramakrishnan

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June 15 (Reuters) - Dollar Tree Inc’s plan to more than quadruple its store count in Canada, as it fights rising competition and slowing sales growth back home, is fraught with risks and will pit it against a formidable rival - market leader Dollarama.

Chesapeake, Virginia-based Dollar Tree, which operates 226 stores in Canada, said in March it planned to open 1,000 stores in Canada over time.

The company is the leading dollar-store operator in the United States, having bought larger rival Family Dollar in 2015. But it is facing growing competition from big-box rival Wal-Mart Stores Inc and upstarts such as Aldi, which have aggressively cut prices and now sell products such as eggs and milk at near dollar-store prices.

Revenue growth at Dollar Tree has stagnated in the past three quarters since incorporating Family Dollar in its results, with growth ranging from 1 percent to 5 percent. Dollar Tree has nearly 14,500 stores in the United States.

In contrast, sales at Dollarama Inc, which owns 1,095 stores in Canada - from Halifax in the east to Vancouver in the west - have grown at a clip of at least 10 percent in the same period. It plans to grow to 1,700 stores over the next decade.

Dollarama has been in business for a quarter of a century, runs an efficient supply chain and its stores have attractive layouts and an established customer base, analysts said.

“Dollarama operates a unique position in the market, largely thanks to geographic reach, the fact that it moved away from C$1 pricing several years ago, and the fact that it is a well-run organization,” said Amanda Bourlier, senior research analyst at Euromonitor International.

Dollarama had an 18 percent share of the $10.47 billion discount retail market in Canada last year. Dollar Tree, which had a 28.1 percent share of the $57.92 billion U.S. market, had a 2.2 percent market share in Canada, according to Euromonitor.

Dollar Tree has said revenue from stores in Canada is not material.

Dollarama is not the only hurdle Dollar Tree will face in Canada. Operating in the country, for instance, is a challenge in itself.

The sparsely populated country has a handful of big cities and establishing a supply chain that works seamlessly over large distances is costly, as Target Corp found out when it set up shop in Canada.

The U.S. retailer exited the market in 2015 after less than two years of operation and incurred a $5.4 billion charge.

“It looks like an enormous opportunity, but there’s a much lower ceiling for growth in Canada,” said Neil Saunders, managing director of retail at GlobalData.

For dollar stores, which operate on razor-thin margins, the risks are greater than for other retailers.

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Dollar Tree, however, is confident that its plan will work because it has successfully dealt with similar challenges before.

“I don’t know that they become bigger factors or challenges by adding more stores. We’ve done that in the U.S. and we can do that in Canada as well,” Dollar Tree spokesman Randy Guiler told Reuters.

Analysts said Dollar Tree could make it work by sticking to its lower price points and targeting a slightly different demographic.

The company, which entered Canada in 2010 through its acquisition of Dollar Giant’s 86 stores, sells goods for C$1.25 or less. Dollarama sells products for less than C$4.00.